The Bangko Sentral ng Pilipinas maintained its policy rate at 6.5 percent as its Monetary Board expects inflation risks from El Niño and power and transport fare hikes to linger.

Consequently, interest rates on the overnight deposit and lending facilities will remain at 6 percent and 7 percent, respectively.

"The balance of risks to the inflation outlook still leans significantly toward the upside," BSP Governor Eli Remolona Jr. said at the central bank's policy meeting on Thursday.

"Key upside risks are associated with potential pressures emanating from higher transport charges, increased electricity rates, and higher oil prices," he added.

Preventing higher prices

The BSP raises its policy rate to prevent higher prices of goods and services by restraining consumer demand.

The Organization of the Petroleum Exporting Countries or OPEC said oil demand will likely increase in the remaining days of the year to 2.9 percent, which might then lead to supply shortage and eventually to higher oil prices.

Russia also announced on 30 November it will cut oil production in the first quarter next year.

The OPEC, however, expects oil demand to stabilize at 2.6 percent in 2024.

Bloomberg data yesterday showed WTI Crude prices rose by 1.30 percent and 1.44 percent for Brent Crude.

"We added additional potential pressure for the first quarter from El Niño. Our forecast is that there will be a stronger El Niño," BSP senior assistant governor Iluminada Sicat said.

Stronger El Niño

Meanwhile, the BSP expects a stronger El Niño or dry season to affect supply of agricultural goods until the first half next year before moderating in the second half.

The BSP estimates average inflation to settle at 6 percent this year, 3.7 percent for 2024 and 3.2 percent for 2025. Inflation last month slowed to 4.1 percent from 4.9 percent in October. The central bank aims to further slow inflation within 2 to 4 percent.

If these inflationary risks materialized, the BSP said inflation could settle at 4.2 percent next year, slightly down from 4.4 percent in its meeting in November, and 3.4 percent in 2025.

Inflation outlook largely unchanged

"The overall outlook for inflation remains largely unchanged," Remolona said.

"These are mainly due to the negative base effects, but inflation will accelerate in the second quarter due to the impact of El Niño and minimum wage adjustments. There will be a return to target in the third quarter and settle near mid-target in the fourth quarter due to decline in global oil prices," Sicat explained.

ING Bank senior economist Nicholas Mapa said the BSP will likely keep its rate elevated for a long time given the aforementioned factors. "We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year," he said.

Jun Neri, chief economist of Bank of the Philippine Islands, agreed the BSP might lower its rate in the second half next year as the government strives to carry out measures to boost production of agricultural goods, especially rice.

"The price of rice may stay high as long as supply stays at this level. Globally, the supply of rice is still a concern due to declining production in major exporting countries such as India," Neri said.